Domestic Saving and Economic Growth Nexus in Ethiopia

Contemporary Evidence from Autoregressive Distributive Lag Approach

Abstract

Accumulated savings serve as a foundation for capital stock, which subsequently foster an increase in investment and output, and ultimately promotes economic growth. Accordingly, this paper aims to analyze the effect of domestic saving on economic growth in Ethiopia, utilizing annual data from 1981 to 2023 and employing the Autoregressive Distributive Lag (ARDL) approach. Prior to conducting the regression analysis, the unit root and bounds cointegration tests indicate that the study variables exhibit mixed orders of integration, thereby validating the suitability of the ARDL approach and confirming the existence of long-term cointegration among them, respectively. Furthermore, the regression results reveal that human capital, exports of goods and services, and the average lending interest rate are significant contributors to economic growth in both the long and short run. Conversely, while the money supply robustly enhances growth only in the long term, domestic savings and economic reforms contribute positively, whereas the inflation rate significantly hinders economic growth in the short term. Therefore, it can be inferred that economic growth reacts differently to variations in domestic savings over the long and short term. Lastly, the coefficient of the Error Correction Term is negative and significant as expected, affirming the presence of a long-run relationship among the study variables. Furthermore, various post-estimation diagnostics and parameter stability tests have confirmed that the results are reliable for meaningful interpretation and validate the robustness of the empirical model. Consequently, this study underscores that the Ethiopian government should formulate and implement policies aimed at enhancing human capital, increasing both public and private savings, diversifying exports, and curbing inflation to expedite economic growth in Ethiopia.